Dynamic Portfolio Insurance Strategy and Its Empirical Research in Chinese Futures Market

摘要

Futures option cannot only hedge volatility of spot price, but also can protect the investor from loss a lot in disadvantageous circumstances. Without appropriate options, alternative strategy can be taken by combining the underlying asset with risk-free asset, that is, by dynamic adjusting positions of the two assets to replicate the desired option. The strategy is named dynamic portfolio insurance. This paper focused on its implementation by dynamic hedging using only the underlying portfolio (or, more commonly, a highly correlated portfolio of futures) and cash. The basic feature of the dynamic hedging strategy is selling out of the underlying portfolio as its price falls, and buying more of the underlying portfolio as its price rises. The former implements a floor on losses and the latter ensures the upside capture. By simulation, we tested the effectiveness of dynamic portfolio insurance strategy in Chinese futures market.